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Are you foolish or wise?

Read the words of business luminary Warren Buffet as he speaks about intelligence as it relates to money:

“… if you take John Meriwether, Eric Rosenfeld, Larry Hilibrand, Greg Hawkins, Victor Haghani, and the Nobel prize winner Myron Scholes. If you take the 16 of them, they probably have the highest average IQ of any 16 people working together in one business in the country,including Microsoft or whoever you want to name–so incredible is the amount of intellect in that room. Now if you combine that with the fact that those 16 have had extensive experience in the field in which they operate. I mean, this is not a bunch of guys who made their money selling men’s clothing and all of the sudden went to the security business or anything. They had, in aggregate, probably 350 or 400 years of experience doing exactly what they were doing. And then you throw in the third factor: that most of them had virtually all of their very substantial net worth in the business. They have their own money tied up, hundreds of hundred of millions of dollars of their own money tied up, a super high intellect, they were working in a field they knew, and they went broke. And that to me is absolutely fascinating. If I write a book, it’s going to be called “Why do smart people do dumb things?

To make the money they didn’t have and they didn’t need, they risked what they did have and did need–that’s foolish, that’s just plain foolish. If you risk something that is important to you for something that is unimportant to you, it just does not make any sense. I don’t care whether the odds are 100 to 1 that you succeed, or 1,000 to 1 that you succeed. If you hand me a gun with a thousand chambers or a million chambers, and there is a bullet in one chamber and you said ‘put it to your temple and pull it’ , I’m not going to pull it. You can name any sum you want. It doesn’t do anything for me on the upside, and I think the downsize is fairly clear. I’m not interested in that kind of a game, and yet people do it financially without thinking about it very much. It’s like Henry Kauffman said the other day — the people going broke in these situations are just two types: the ones who know nothing, and the ones who know everything.

The bottom line: Avoid doing foolish things.

Here are three things foolish people do:

1. Buy High and Sell Low

Many people tend to allow irrational exuberance to overtake them. Investing is one of the few areas where people tend to do the opposite of what they should do. When you go grocery shopping, do you try to buy the highest price items or do you look for items on sale? We typically look for items on sale, but many tend to do the opposite when investing. Many wait until an investment has reach new highs and then buy.

2. Trade instead of investing

If really smart people can’t consistently beat the market, why would the average investor think they can outperform?Often times, it is because people believe that they have some advantage. If the geniuses with multimillion dollar budgets and research teams can lose billions of dollars, what chance do you have to consistently outperform the market? The difference between trading and investing is that the latter implies that you have made a commitment to hold onto the investment for some specified time frame (typically longer than a year).

3. Put too much in one investment

Again, people often follow the masses. Here’s a typical scenario: An investment is selling at his highest price (a la the housing market just a few years ago) and people decide its going to keep going higher.They decide to double down (poker terminology) and either go all-in or make a very large investment with the hope that they’ll make a commensurate amount of profit. After all, nothing ventured nothing gained. Unfortunately, the investment does pan out and they lose big. Diversify.

“The way of a fool is right in his own eyes, but he who heeds counsel is wise.”